Is a Purchase Order a Binding Contract?

Is a Purchase Order a Binding Contract?

A purchase order (PO) is a document sent from a purchaser to a vendor, which serves as an agreement between the two parties. The company must approve the PO before it leaves the purchasing department and goes to the supplier.

All purchase orders are legal contracts between purchasers and suppliers, serving as the first contact between two parties about an order, so that’s why it’s critical to use them and develop a purchase order process in your company. A common misconception is that the document only serves for recordkeeping purposes and cannot be used in the event of a legal dispute between the vendor and the buyer.

According to the Uniform Commercial Code, a contract for the sale of goods may be made in any manner sufficient to show agreement, and that “an order or other offers to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods.”

A federal court in Norfolk, Virginia, in the case of Mid Atlantic International Inc. v. AGC Flat Glass North America, ruled that purchase orders are an enforceable contract between the parties.

A PO includes the name of the company making the purchase, a purchase order number, delivery date, address for an invoice, quantity, and description of goods and services requested, pricing, payment terms, and any necessary payment information.

“Controlling business purchases is one of the most important functions in the business since it has such a direct impact on profit. All businesses have to make purchases to keep their businesses running to generate revenue.”

Terms and Conditions for Both Parties

For every PO, there can be agreed upon rules for both parties that apply to that specific PO, but neither supplier nor purchaser can accept PO terms that require either the supplier or the purchaser to violate any governing industry regulations.

In many situations, purchasers are unable to get buyers to agree to negotiate terms because there’s no leverage. If the buyer doesn’t agree to the negotiated terms, the vendor has to state that they have to raise the quoted price, or they won’t be able to complete the deal. Generally, the extent of regulations in both industries determines the form of the transaction.

Some companies build it into their processes that they will not pay unless there is a purchase order. This puts things in favor of the purchaser unless the vendor forces a different process. In cases like this, it’s possible to end up with a PO that has no terms or cross references to the terms of the contract.

Contracts between vendors and purchasers are preferred with the terms of the agreement exceed the basic terms of the PO. Where there is significant value, there tends to be a significant risk. And when low-value acquisitions that could affect major infrastructure, the risk of loss becomes an issue along with the risk of cost.

How to Implement Purchase Orders in Your Procurement Processes

Using a centralized system such as PurchaseControl makes it easy for you to adjust your business process. With it, you can designate who has the authority to create purchase requisitions to state a need for goods or services. It also gives you the ability to determine which staff members have the authority to approve those requests and place orders with the vendors.

You can store information about each vendor, including a copy of any contract between the two of you, to ensure compliance on the part of both parties. Purchase requisitions are automatically assigned a purchase order number, which is then attached to an invoice once the order has been received and reconciled against the purchase order.

The audit trail tracks who took what actions on anything in the system to keep everyone accountable. It also helps the finance department in making sure the bills are paid on time, to help procurement negotiate better payment terms and early payment discounts to keep a higher amount of working capital available.

Over the long term, the electronic purchase orders streamline the process to make it more efficient, so you don’t have to spend valuable manhours chasing down goods and services or with back and forth communications with vendors. You’ll be able to see how well suppliers are performing and make adjustments to your purchasing process as needed. Implementing a system like this also helps to protect vendors, because it provides proof that goods and services were ordered.

In the event that either party ever takes legal action against the other, both parties have the legal documents to support their claim. It’s smart for a small business to protect themselves with the use of purchase requisitions and purchase orders.

PurchaseControl can simplify your purchasing process, while ensuring you use purchase orders to protect you and your suppliers.